Tuesday, June 13, 2006


Monkeyed Business

In an interview with Maria Bartiromo, George Soros made the first comment I've heard that actually explained the drops in world markets. Now, if only I knew what it means. The official story line is inflation: "Investors across Asia dumped stocks on speculation that the U.S. Federal Reserve might raise interest rates later this month, stoking fears of an economic slowdown in the U.S., the biggest export market for many Asian countries. A decline Monday on Wall Street also hurt sentiment." But this is ridiculous. The Fed has been moving cautiously. Inflation drivers, like oil, seem to have topped out (though I hear that blocking the border is driving up food prices as groers actually have to pay American wages). One would expect investors to move into gold or land or some other inflation-resistant asset. Instead, gold has headed down and real estate both here and in Asia is iffy. Anglogold is down from $57 to $39 in ca. 5 weeks, for example. Meanwhile, US bluechips have edged up. So, what's up? Part of it is that foreign markets are smaller than the US market. Other countries rely more on bank financing and less on stocks. So small capital flows affect them. Also, there's profit taking. If your stock has run 100%, as many foreign stocks have done, why not cash out a quarter of it, and reinvest? But these explanations aren't adequate. The risk to the dollar is still large. Brand America is still mired in Iraq. US corporations continue to pull financial shenanigans. But what Soros said made the penny drop. The Bank of Japan has withdrawn $200B in liquidity. This explains why market drops in Asia have been so substantial, while the damage has been secondary in American and European markets. It also explains why gold has fallen, since if there's less money to chase speculative investments, they tend to return to normal levels. But why is BoJ doing this? Observers I read say that Japanese business investment, while strong, is well below bubble levels. The Indian and Chinese rates of growth may be moderating, India because wages have risen to the point it's no longer quite as cheap, China because the economy can't keep up. BoJ may be overly nervous, as some have suggested. But I keep wondering whether this is isn't a favor to the US. Falling markets a favor? Well, yes... if the alternative is higher rates. If the Fed raises rates, the Republicans will face a very hostile electorate. But suppose the BoJ mops up excess world liquidity, while allowing the party to continue in the US a few more months. Could be. All I know is that the BoJ explanation fits the facts, but makes no sense otherwise.
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